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European stock indices were sharply lower mid-morning, shrugging off yesterday’s solid gains on Wall Street. It feels as if European and US investors are looking at different headlines. While US markets soared on Monday, apparently on relief that the long holiday weekend passed off without incident, European players are less sanguine. Certainly, there is little evidence that the relationship between the US and North Korea has improved since last week. On top of this, European investors are wary following the controversial Turkish referendum which saw President Erdogan consolidate and extend his authority and powers in domestic matters. Certainly, this morning’s market action suggests that there are plenty on traders out there who are no longer simply prepared to “buy the dip.”

Financial markets had already been pulling back from their best levels over the past few weeks thanks to doubts over the Trump administration’s ability to push tax cuts, spending plans and regulatory reform through Congress over the coming months. Just this morning US Treasury Secretary Steven Mnuchin told the FT that the target to get tax reforms through Congress before August was "highly aggressive to not realistic at this point".

Then there are the concerns over the likely pace of Fed monetary tightening just as doubts over US economic growth are being voiced. Yesterday the yield on 10-year Treasuries fell below 2.20% to hit their lowest levels since mid-November. Treasuries did recover somewhat, however this does suggest that the US reflationary trade is over for now.

Stock Index Update

· European indices shrug off US gains

· Mixed start for US earnings season

All the European majors closed lower ahead of the Easter break. This was despite a modest turnaround in US indices, particularly the tech-heavy NASDAQ100 going into the long holiday weekend. European markets remained closed yesterday. However there was a big rally in the US indices which saw the Dow, NASDAQ and S&P all up around 0.8% to make back a significant proportion of last week’s losses, and close out at their highs for the session. Yet despite this European equity prices are struggling this morning, suggesting that investors don’t trust yesterday’s US rally.

The first quarter US earnings season has just got underway. Last week saw the release of earnings reports from three of the biggest US banks. JP Morgan posted earnings per share of $1.65 which was well above the $1.52 expected. These came on revenues of $25.59 billion which again comfortably above the consensus forecast of $24.88 billion. This compared with earnings of $1.35 and revenues of $24.08 for the same time last year. Citigroup posted earnings of $1.35 per share on revenues of $18.12 billion. As with JP Morgan both numbers were safely above the consensus forecast of $1.24 and $17.76 billion respectively. This time last year the bank reported earnings of $1.10 per share on revenues of $17.56 billion. Finally, Wells Fargo reported earnings per share of $1.00 versus the consensus estimate of $0.97. But revenues were a touch light coming in at $22.0 billion against an anticipated figure of $22.32 billion. The shares in all three banks ended lower on Thursday night, with Wells Fargo suffering a particularly sharp sell-off. However, they all bounced yesterday along with the broader market and the question now is whether they can build on those gains in today’s session.

Commodities Update

· Crude prices head lower

· Precious metals pull back from best levels

Crude prices began last week rallying sharply. Both Brent and WTI traded up to levels last seen in early March. This was just before the release of US inventory data which showed a record build in stockpiles. The news was the trigger for a dramatic sell-off over the next two weeks, exacerbated by excessive long-side speculative positioning. Oil prices rose at the beginning of last week as the latest US inventory releases showed larger-than-expected drawdowns in crude stockpiles. However, both Brent and WTI have drifted lower ever since in a move that looks like profit-taking more than anything else.

On Thursday the International Energy Agency released its latest monthly report. This suggested that the global oil market is now close to balance after three years of excess supply. Output cuts by OPEC members and a number of other major oil producers have helped to offset a fall in demand growth from amongst the richest nations. At the same time, there’s some robust demand from developing nations such as India and China. But offsetting this to some extent is US production which continues to rise.

Last week gold and silver both soared after President Trump said he thought the dollar was “getting too strong” and that he’d like the Fed to keep interest rates low. The dollar slumped on the news and gold soared above $1,280 and is now back to highs last seen in the immediate aftermath of the presidential election back in November. Silver appeared to make a decisive break above $18.40 - a level that had acted as resistance over the last six weeks - although it ended yesterday’s session sharply lower thanks to a sudden pick-up in US risk appetite. Despite this, like gold, silver is now trading back at levels last seen in the immediate aftermath of the US presidential election. Both precious metals should stay in demand as safe have plays on the back of escalating geopolitical risk. In addition, falling US treasury yields suggest that the bond market is unsure about the pace of monetary tightening from the US Federal Reserve.

Forex Update

· Dollar remains under pressure

· US 10-year Treasury yield lowest since November

The US dollar was back in the headlines ahead of last week’s Easter break following comments from President Trump. Investors were taken by surprise by comments made during an interview with the Wall Street Journal. Mr Trump said he thought the dollar was “getting too strong” and that he’d like the Fed to keep interest rates low. The dollar slumped on the news but then steadied ahead of the Easter break. Traders were keeping a close eye on the 10-year US Treasury yield which fell sharply and broke below support at 2.30%. Yesterday the yield on the key US 10-year Treasury bond broke below 2.20% for the first time since mid-November last year. Much of the move comes as investors seek out US Treasuries as safe haven on rising geopolitical risk.

The dollar and bond yields recovered later in yesterday’s session. This saw the Dollar Index push back above 100.00, but the USDJPY, which is a major signifier of the “risk on/off” trade, is still a long way below 110.00 - a level which has previously acted as significant support.

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